The controversial “third country” or “passport” rules in the EU’s proposed Directive on Alternative Investment Fund Managers were among the main topics of discussion at the European Private Equity and Venture Capital Association’s Investor Forum in Geneva last week.
The rules would prohibit foreign fund managers from marketing within the EU unless they can demonstrate that they are subject to a regulatory regime of equivalent rigor in their home country. Currently, many major EU trading partners, including the US, Russia, China, India and Brazil, do not meet this standard, and therefore would be denied a “passport” to market within the EU.
“A free movement of capital is vital for the financing of the European economy,” said Richard Wilson
, chairman of the EVCA. “This can be achieved within an EU internal market only by the recognition of equivalent regimes and a fair and level playing field for all market participants that reach certain standards. In addition, at least until such equivalence is reached, national private placement regimes must endure to preserve inward investment into Europe’s economies.”
We strongly hope that the rules you put in place will ensure that non-EU fund managers and global custodian banks have the same access as their EU counterparts.
One potential solution that has been tabled by industry insiders would be to allow non-EU fund managers to market in individual EU member states by complying with the existing system of national private placement regimes until the manager is able to establish the equivalence of its home regime.
EVCA has spoken out against the third country rules for months, but lately the rhetoric against this part of the directive has reached a critical mass, with regulators, legislators, and trade associations around the world raising an alarm.
Last week US Treasury Secretary Timothy Geithner sent a sternly worded letter to Michel Barnier, the European commissioner for the internal market, expressing his concerns about the third country rules.
“I believe we agree that it is essential to fulfill our G-20 commitment to avoid discrimination and maintain a level playing field,” Geithner said in the letter. “In this context, we are concerned with various proposals that would discriminate against US firms and deny them access to the EU market that they currently have. We strongly hope that the rules you put in place will ensure that non-EU fund managers and global custodian banks have the same access as their EU counterparts.”
The comments prompted Barnier to say via a spokesman that the pending legislation is in line with G-20 proposals.
According to a Financial Times report on Friday, French President Nicholas Sarkozy and British Prime Minster Gordon Brown shared Geithner's concerns and planned to meet on the issue to discuss solutions.
If adopted in its current form, AIFs in developing countries could lose access to funding from the EU market, and EU investors, including EU member development banks, would be limited in their ability to promote private sector growth in the world’s poorest countries.
The Institutional Limited Partners Association (ILPA) – whose roughly 220 members control the vast majority of commitments to private equity funds across the world – also sent a four-page letter to Barnier, describing how the diminished access to capital for EU companies will harm European private equity.
The Emerging Markets Private Equity Association (EMPEA) has written similar letters to the European Commission, the European Parliament and the Spanish presidency, expressing “profound concern” about the third country rules.
“If adopted in its current form, AIFs in developing countries could lose access to funding from the EU market, and EU investors, including EU member development banks, would be limited in their ability to promote private sector growth in the world’s poorest countries,” Sarah Alexander, EMPEA CEO, wrote to Spanish Minister Elena Salgado Mendez. “The third country and equivalency provisions contained in the draft directive would make it either legally impossible or cost-prohibitive for emerging markets fund managers to raise capital in various EU
markets, jeopardising their ability to raise sufficient funds for investment and therefore to be viable as
going concerns.” EMPEA estimated that more than 90 percent of its members market funds to the EU or have European LPs.
Andrew Baker, chief executive officer for the Alternative Investment Management Association (AIMA) has said that the effect of restrictions imposed on European investors would be felt around the globe, hurting asset managers in financial centres such as the United States, Canada, Switzerland, Hong Kong.
The UK’s House of Lords has also called the directive’s marketing restrictions “protectionist” in a letter to UK Financial Services Secretary Lord Myners. The House of Lords in November had heard testimony from industry figures including Danny Truell
, chief investment officer of the Wellcome Trust charitable foundation, who said that the directive in its current form would seriously restrict investment opportunities for many EU foundations and charities.